Unless Congress acts soon, the Homebuyer Credit that was extended and expanded last November by the Worker, Homeownership and Business Assistance Act of 2009, is set to expire. Under that act, in order for “first time homebuyers” to take advantage of the up to $8,000 tax credit and for certain “qualified repeat homebuyers” to take advantage of the up to $6,500 tax credit, they must meet one of the following timing deadlines to be eligible for their applicable credit:
(1) must have purchased the new home on or before April 30, 2010 (which means the date that the taxpayer closed on the transaction and title to the property transfers to the taxpayer homebuyer);
(2) (a) the purchasing taxpayer homebuyer must have entered into a binding contract for the purchase of a home on or before April 30, 2010; AND (b) must close on the home on or before June 30, 2010.
Qualified Repeat Homebuyers
For “qualified repeat homebuyers” to take advantage of the $6,500 tax credit, they must purchase a principal residence after November 6, 2009 and before the above deadlines and they must have owned and resided in the same home for at least five consecutive years out of the previous eight years prior to the purchase date. For married taxpayers, both spouses must pass this test and if one fails, they both fail. Repeat homebuyers do not have to purchase a home that is more expensive than their previous home.
The tax credit available to qualified repeat homebuyers is equal to ten percent of the home’s purchase price up to a maximum of $6,500. Homes priced above $800,000 are not eligible for the credit. The tax credit amount is subject to modified adjusted gross income limitations. The modified adjusted gross income limit for single taxpayers is $125,000 and the income limit for married taxpayers filing jointly is $225,000. The tax credit is reduced for taxpayers with modified adjusted gross income above those limits. The reductions occur over a phase out range of $20,000. That means that the tax credit will be reduced to zero for taxpayers with incomes over ($145,000 – single) and ($245,000 – married) and will be proportionately reduced for those in between.
This credit is “refundable,” which means that even if a taxpayer has little or no taxable income, they can still claim the credit and receive a refund. For example, if the taxpayer had a tax liability before the credit of $2,000 and the taxpayer would be entitled to a $6,500 tax credit as a qualified repeat homebuyer, the taxpayer would be entitled to receive a refund from the federal government equal to $4,500.
First Time Homebuyers
To be eligible for the “first time homebuyer” tax credit of $8,000, the taxpayer must be a “first time homebuyer” and purchase a new home between January 1, 2009 and April 30, 2010. However, as stated above, if the taxpayer has entered into a binding contract prior to April 30, 2010, if they close on the transaction on or before June 30, 2010, they will still qualify.
A “first time homebuyer” is defined as a homebuyer who has not owned a principal residence in the three years prior to the purchase. Both spouses must meet the three year test to qualify. If qualified, the homebuyer will get a credit that is equal to 10 percent of the purchase price of the home up to $8,000.00. The income limitations set forth above for qualified repeat homebuyers are the same for first time homebuyers who purchase after November 6, 2009; however, the modified adjusted gross income limits for first time homebuyers who purchase between January 1, 2009 and November 6, 2009 are still subject to the $75,000 limit if single and $150,000 for married couples filing jointly.
The first time homebuyer credit is “refundable” as explained above in the section regarding qualified repeat homebuyers.
This article is not intended to be exhaustive on the subject matter nor to apply to any individual’s unique circumstances and we therefore highly recommend that you discuss your individual situation with a qualified tax advisor before relying or acting upon the information contained herein.